Reincarnation of ‘financial innovation’ that G20 leaders need to destroy

We know just how big business hangs on the coat tails of big government. We saw it earlier this week when 215 American CEOs accompanied US President Barack Obama to India. And we saw it again on Thursday, when 120 chairmen and CEOs, held a summit that paralleled the one that the world’s 20 largest economies--the Group of 20 (G20) -- will hold today, at Seoul.

We know just how big business hangs on the coat tails of big government. We saw it earlier this week when 215 American CEOs accompanied US President Barack Obama to India. And we saw it again on Thursday, when 120 chairmen and CEOs, held a summit that paralleled the one that the world’s 20 largest economies —the Group of 20 (G20) — will hold today, at Seoul.

Baptised Seoul G20 Business Summit, leaders of some of the world’s largest banks including Deutsche Bank chairman Josef Ackermann, Standard Chartered Group CEO Peter Sands and HSBC chairman Stephen Green, mirrored the discussions of the world’s largest economies. Following the G20 leaders, the business summit issued a joint statement that looks serious as the communiqué the G20 leaders have been signing on ever since the ongoing global economic crisis broke out on September 15, 2008.

I’m not against big business, but the idea that some of the institutions that caused the crisis in the first place by finding loopholes with which to pierce their own customers, employees and investors, is being given this pride of place at Seoul is disappointing.

The Business Summit made four broad recommendations — green growth promotion, corporate social responsibility, trade and investment, and regulatory reform. Of these, only the last two matter — green growth and CSR are attention-diverting red herrings. On the issue of trade, where the CEOs have called on the G20 to ensure the completion of the Doha Round by 2011, the CEOs’ notes are in tune with what’s needed.

It is the financial aspects, particularly the sixth point in clause 10, that I’m suspicious about. “New standards for banking regulation and supervision must be sufficiently strong and responsive, while still encouraging growth and financial innovation,” the statement says. In these 20 words lies an expression — financial innovation — that has led to the crisis in the first place.

Since the 1960s through the 1980s, financial innovation created a battery of products that helped investors reduce risk. But in the 2000s, this exotic expression soon turned to the dark side, with so much complexity that even regulators couldn’t figure out the risk in these innovations. So, while equity derivatives helped investors take decisions on risk-based investing through the creation of low-cost, risk-reducing tools that created a stock market boom, in its reincarnation, it got manipulated into bizarre forms and mauled average citizens through excessive risk by creating products that just didn’t exist — lemons like synthetic derivatives.

The aftermath is something taxpayers, through the G20, are still grappling with — and I suspect will continue to fight for two more years. Meanwhile, financial gangsters are unwilling to forego their bonuses and are resisting any restrain on their incentive system — the real root of the problem that the G20, for some reason or another, is unwilling to address. It is this incentive system that the G20 needs to attack and destroy in a long war looming ahead, and whose the next battle is today.

As far as the Business Summit goes, I think it has lost the credibility to sit on the high table of global finance. They are participants who need to be tightly regulated. They cannot be driving global financial agendas.